Page 4: Analysing accounts
Financial statements are prepared primarily for the members of the company, but they will inevitably be used by other interested parties. For example:
- Present and potential investors (and their advisers) will want to know whether the business is a good investment.
- Lenders and suppliers will want to know if the business is a good credit risk.
- The Government will want to make sure that the correct amount of tax is being paid.
As part of their analysis, they will most certainly calculate ratios, i.e. they will relate one figure in the accounts to another. Financial ratio analysis is an analysis of financial ratios computed from an entity’s financial statements.
Accounting ratios help to summarise and present financial information in a more understandable form. They assist in assessing a business’s performance by identifying significant relationships between different figures. Ratios do not provide answers, but help to focus attention on important areas.